What happens when you give out lots of property rights, but nobody exactly knows what those rights cover? Yes, that might describe software/business-method patents and the result is costly litigation, disputes and a net disincentive for innovation.

But that also describes recent markets in collateralized debt obligations and credit default swaps. And with these markets, as anyone who has read a newspaper (some people still do that) during the last month knows, the result is a bit more ominous. My former venture capital investor and all-around Wise Man, Ben Rosen, sums up the current financial crisis in three words: “Nobody Knows Anything.”

Property rights have the potential to be strong institutions promoting economic growth. But, as these examples show, if the rights are not well-designed and well-implemented, they can be perverted from this goal. Brian Kahindraws the parallel between the financial/real-estate “bubble” with the still-expanding “bubble” in patents. As Brian suggests, combine that bubble with a Ponzi scheme (Intellectual Ventures) and you might have a real perversion.

Mike Masnick at Techdirt takes issue (”Why Treating Patents As Property Is A Bad Idea”) with the argument that patents should be evaluated as a property system, an argument that Mike Meurer and I make in our book, Patent Failure. Of course, Mike and I do not argue that this is the only way the patent system should be evaluated, but we think it is important to look in detail at the way the institutions of the patents system actually work. All too often, these details are glossed over and it is assumed that they work as well as, say, the property institutions for land.

Unfortunately, Mike Masnick confuses our call to evaluate the functioning of patent institutions by comparison to other property institutions with some of the more general rhetoric about “patents as property.”

There is little doubt that “property” has long been a great rhetorical confection. Property is, after all, “theft” (Proudhon) and also the source of “economic freedom” (Friedman). Some people argue that “patents are property” and by this they mean that patents should have very strong and very rapid enforcement. As Masnick points out, Mark Lemley used this viewpoint as a straw man in a recent paper. Lemley describes a “real property system” as one where patents with uncertain validity or uncertain boundaries (so you can’t tell upfront that they are infringed or not) are strongly enforced.

Clearly, this is a bad idea and it is hardly what Mike Meurer and I are talking about. In our view, patents with uncertain validity or uncertain boundaries are not at all like tangible property and strong enforcement of such rights is not justified.

Unfortunately, there is a tendency to reduce property to a single dimension: “strength.” But real property systems, as opposed to rhetorical confections, involve complex institutions and there is value in understanding how they can and should work.

…in new areas of patenting such as software and business methods, there is strong evidence that existing intellectual property arrangements are hampering innovation. …The inventive steps required to qualify for patents should be considerable, and the resulting patents must be well-defined, so as to minimise litigation and maximise the scope for subsequent innovation.

There has been a debate among legal scholars about whether patents were seen by the framers of the US Constitution as “property” or, as Thomas Jefferson charged, a monopoly “privilege.” For instance, Adam Mossoff has argued that the case law of the early nineteenth century shows that judges treated patents as an expansive property right.

But one thing is clear and is often forgotten: the early patent system lacked basic institutional features necessary for an effective property system. For example, it was very difficult to find out what had already been patented, aside from actually infringing a patent and then receiving a complaint from the patent owner. That is, the basic “notice” function of property was largely missing.

In 1845, Rufus Porter, an itinerant mural painter and sometime inventor from western Maine, began Scientific American as a publication that summarized new inventions. In 1846, he sold it to Munn and Company, the largest patent agent, and they began systematic reporting on new patents. Prior to the 1840s, occasional Annual Reports from the Patent Office would list granted patents, but little detail on claims and no drawings were available to the public without visiting the Patent Office in Washington (or corresponding with a patent agent, also time-consuming and imperfect). In 1843, the Annual Report included claims of the patents granted. In 1854, the Annual Report first included selected patent drawings. Only with the Act of 1870 (and the advance of lithographic printing) was the Patent Office required to provide copies to the public, including libraries. At that time the Official Gazette replaced the Annual Reports.

A similar pattern seems to have played out in Britain, where the first complete index of patents was published in the Abridgements of Specifications in 1853.

Thus, however much judges might have viewed patents as a form of property, it seems that the role of patents to function as an effective property system was significantly compromised during the first half of the nineteenth century.

We (Bessen and Meurer) received a nice note from Judge Plager letting us know that he cited our book, Patent Failure, in his recent speech where he called for rethinking patent law by returning to its origins in property law.

Judge Plager writes that as a former law professor who taught property law for twenty-five years, he found our general thesis about analyzing patent law from a property law perspective “quite comfortable.” The book argues that many of the key institutional features and much of the economic performance (and many of the problems) of the patent system can be analyzed by treating patents as a property system. In his speech, Judge Plager suggested that this approach might require rethinking the patentability of software and business methods, doctrines of claim construction, patent scope and the doctrine of equivalents.

Judge Plager also pointed out a disagreement he has with us. In the book, we support the view of John Duffy and Craig Nard, who call for multiple appellate courts for patents (see Tim Lee’s recent summary). In a paper with Lynne Pettigrew, Judge Plager argues against this view.

Often, rethinking something is a lot harder than thinking it out in the first place. This is particularly true for judges, whose decisions are published and used as precedent. Indeed, this “path dependence” of the court is one of the concerns that Duffy and Nard raise.

In this light, Judge Plager’s call to rethink patent law is more than a little courageous. And I suspect that the willingness of Judge Plager’s colleagues on the CAFC to join in the project he proposes will shed light on the correctness of Duffy and Nard’s proposal.